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OPINION: The Future of Banking Will Be Impacted By Its Criminal Past

OPINION: The Future of Banking Will Be Impacted By Its Criminal Past

 How are cartels and other bad actors influencing banking? Are banks sufficiently penalized for corruption, fraud, and money-laundering, or are the resulting financial penalties another mere gimmick to fill the government exchequers? Are banks getting away with crime? 

From 2012 to 2020,  two major financial institutions – Hong Kong Shanghai Banking  Corporation (HSBC) and Wells Fargo –  have allegedly been involved in multiple legal rackets (i.e. organized financial crime). It was during this time that both banks were charged with fraud and money laundering, among other offenses. In this two-part series, we will examine the allegations of how HSBC and Wells Fargo Bank skirted the law while getting away with a “tap on the wrist” by the U.S. Department of Justice (DOJ). Part One of this series examines HSBC. 

So, there are two looming questions evolving from these cases – how do authorities control drug trafficking when major corporations are funding cartels, helping them move money and, ultimately, benefiting from these operations? What happened to Corporate Social Responsibility? By reviewing the actions of two key financial players, the public can see what happens when banks “go rogue.”

Why Bank Oversight is Important

Every bank is obligated to implement effective anti-money laundering programs. Failure to do so can result in felonies ranging from third to first degree. The laws allow the imposition of either jail time or fines or both. Complications can arise for legislators when assessing the extent of these violations and their appropriate punishments. That’s why more than ever when writing on these matters to the courts, legislators need to express clear instructions. For such heinous oversights, compliance departments, boards of directors, trustees, and individual bankers must be liable, not only monetarily, but criminally.

How Big is HSBC?

Since 2012, HSBC has been the heavyweight in a series of alleged financial misdeeds showing not only negligent oversight but acts of outright criminality. So, how big is HSBC — really? 

HSBC is now one of the largest multinational investment and financial services banks since it was established 155 years ago. Headquartered in London, HSBC is a global financial institution with 3,900 offices in 65 countries and over 235,000 key staff members, as of 2019. The bank counts 14 subsidiaries including HSBC Bank, USA. The bank as a whole functions with four primary subgroups encompassing Commercial Banking; Global Banking and Markets (also known as Investment Banking); Retail Banking and Wealth Management; and Global Private Banking. Armed with this much financial firepower, HSBC boasts about 38 million customers, worldwide.   

The Allegations — How We Got Here

In July 2012, the U.S. Senate, with the bi-partisan support of Senator Carl Levin, a Democrat, and the late Republican Senator Tom Coburn, released a report prepared by the Permanent Subcommittee on Investigations. After the report was released, the value of HSBC’s New York-traded shares dropped drastically, plummeting down to $42.50 by 2.5%. What follows here is a listing of the various charges and allegations. Among the subcommittee’s findings:

1. HSBC violated numerous banking rules while also exposing the American financial system to “money-laundering, drug trafficking, and terrorist financing.” This report further concluded that HSBC’s Mexican affiliate (i.e  name- confidential.) moved $7 billion dollars in U.S. currency from suspected drug sale proceeds in 2007 and 2008. (Refer to the sources below)

2. HSBC allegedly collaborated with cryptocurrency giant, Hardware Blocking/Unblocking Sending  (HBUS), to launder American dollars. HBUS is a “virtual currency marketplace,” allowing customers to deposit cryptocurrencies. It is the U.S-based strategic partner of Huobi, the fourth-largest cryptocurrency exchange platform, in terms of trade volume. According to reports, two of HSBC’s affiliates processed or laundered $19.4 billion in 25 transactions through HBUS. HBUS in turn offered corresponding banking services to HSBC in Mexico.  

3. According to authorities, HSBC is alleged to have cleared $290 million in “suspicious travelers’ cheques.” Authorities believe these cheques benefited Russians in their used car shell businesses.

4. Several Saudi-Arabian and Bangladeshi banks, allegedly connected with certain terrorist organizations, were given U.S. dollar financing.

5.  According to the Department of Justice, between 2007-2012, HSBC illegally conducted transactions without the correct regulatory authorizations and proper anti-money laundering due diligence on behalf of the governments of Cuba, Sudan, Iran, Libya, and Burma.  

6.  The DOJ confirmed that Mexico’s Sinaloa cartel and Colombia’s Norte del Valle cartel laundered $881 million through both HSBC and one other affiliated Mexican financial unit. 

7.  HSBC not only admitted to committing fraud, facilitating money laundering by the various drug cartels, and being willfully negligent with due diligence; the bank also agreed to forfeit $1.256 billion dollars and enter into a Deferred Prosecution Agreement with the DOJ. (Refer to the sources below.)

The DOJ penalized HSBC with a $1.92 billion fine under the Deferred Prosecution Agreement. The bank later agreed to pay an additional $665 million worth of civil penalties to the U.S. Office of Comptroller of Currency, the U.S. Treasury, and the Federal Reserve Bank.

Analyzing the Deferred Prosecution Agreement 

Although the charges are numerous and serious, the DOJ has shown leniency and flexibility while imposing restrictions. This agreement even allowed the parties to extend the terms beyond five (5) years.  Under the agreement, HSBC “waived its indictment, speedy trial, and objection-placing rights.” 

Still, the bank’s many charges included  “(a) willfully failing to maintain an effective anti-money laundering program ; (b) willfully failing to conduct and maintain due diligence on correspondent bank accounts held on behalf of foreign persons; (c) willfully violating and attempting to violate the Trading with the Enemy Act; and (d) willfully violating and attempting to violate the International Emergency Economic Powers Act.”   

Why the Agreement Matters  

Although the list of remedial measures that HSBC should implement is broad, a framework for specific anti-money laundering is missing. The Agreement placed significant stress on the compliance team while not putting enough weight on compliance measures.

Current recommendations and measures include changing key bank staff members, instituting “Know Your Customer” techniques, proper budgeting, and other human resource remedies.   Although solutions have been reached on what to do to rectify many of HSBC’s actions, the Deferred Agreement still contains controversial clauses like the “Conditional Release From Liability.” 

Under this clause, the DOJ agrees to not prosecute the HSBC parties or its affiliates in civil or criminal proceedings or to use information gained about (illegal) conduct against any HSBC parties or its affiliates in exchange for HSBC cooperation. The rationale for extending this agreement, containing certain privileges to HSBC parties and affiliates in civil matters, has never been officially spelled out.

Additional clauses in this Deferred Agreement  –  including the grounds used to determine the monetary penalties — have never been fully analyzed for clarity in the Agreement’s terms or in officials’ statements.  

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Why Government Enforcement Failed  

It is incredible to think that the Office of the Comptroller of the Currency failed to take any enforcement action against HSBC. Not only did the bank fail to monitor $60 trillion in account activity, but approximately 17,000 accounts were not reviewed despite showing suspicious activity. 

The Office of the Comptroller of the Currency is responsible for ensuring that national banks and federal savings institutions operate in a safe manner and treat customers fairly. They also play a role in ensuring that banks are in compliance with all applicable laws.  The sheer lack of anti-money laundering due diligence and the inability to impose regulatory mechanisms is shocking.

The Department of Justice has, to this day, failed to explain the grounds on which a Deferred Prosecution Agreement (‘Deferred Agreement’) was enacted with HSBC. This bank violated the Bank Secrecy Act, the International Emergency Economic Powers Act, the Trading with the Enemy Act, various compliance laws, and a plethora of anti-money laundering laws. 

The DOJ claimed that HSBC was too large to prosecute under the Federal Criminal Procedural laws. The fact that such an exception applies to bankers working for such big corporations reflects the bias within the American judicial system. Not one single board member or employee of HSBC USA was prosecuted despite this being one of the largest forfeitures involving a bank.

HSBC admitted to “allowing itself to be used to launder a river of drug money.” The impact of this negligence is widespread and the loss of millions of dollars is addressed under the Deferred Agreement. Indeed, the harm of money laundering cannot be overlooked. Young people were not only influenced to consume drugs but informed by the easy illegal remittance of money that white collar crime is inconsequential and not always criminal. 

The governmental bodies received tremendous financial gains from the Deferred Agreement. This made it easy for regulators to look the other way, thus freeing bank officials from the burdens of responsibility for their heinous crimes. As a result, HSBC got away with a mere apology and a hefty payment to the government. What does this say about the gaps in our justice, administrative, and economic systems? 

HSBC and the Mexican Cartels

 It’s no secret that Mexican drug cartels reputedly launder large sums of “dirty” money in their attempts to export illegal drugs. Despite those activities, HSBC categorized Mexico as a “low-risk” country. So, what are both Mexican and U.S. lawmakers doing to ensure that no other bank takes due diligence this casually?

Nowhere does this laissez-faire attitude show up more pointedly than in HSBC’s hiring norms in Mexico. Allegedly, the CEO of HSBC’s Mexico division may have had “a recording of a drug lord saying that HSBC was the place to launder money” — law enforcement be damned.  Clearly, HSBC’s Mexican unit did not value competency, dedication, integrity, and honesty while hiring someone as important as the CEO.  

With understaffing reflecting only one or two HSBC officials overseeing the banknote transactions of 500-600 customers, what steps did the governing bodies take to prevent money-skimming, wrongdoing, and ensuring the bank’s compliance? Moreover, what are officials doing currently to ensure that the compliance units of HSBC and other banks are well-equipped and adequately staffed? Unfortunately, these questions remain unanswered.

Why HSBC’s Actions Described as “Woefully Inadequate”

Other banks that were under investigation saw the Deferred Agreement as providing an opportunity to review their settlement options. Numerous European and U.S.-based banks settled with regulatory authorities — the collective amounts exceeding $5 billion. 

 Banks allegedly took these measures to evade prosecution for failing to “police illicit transactions.” What’s noteworthy is that even after settling with authorities, many banks did not curtail their illicit transactions, nor were existing and even new rules properly implemented. On the contrary, settlement agreements provided these banks with certainty and breathing room. Ultimately, the only other thing that they needed was money. Where it came from, has never really been addressed. 

The DOJ justified its actions by reiterating that “while making sure criminals can be prosecuted, it is also important to look at collateral damages.” Understanding the effect of collateral damages aids in assessing the long-term economic and social impact of banks’ benefiting from criminal activity. 

When financial wrongdoing is uncovered, the banks ultimately pay taxes and huge penalties for connections with “dirty money.” But, is that enough to keep banks in check? A more powerful move would be to prosecute at least a few key decision makers at the banks when violations occur. Or, to put it another way, the “precaution is better than the cure.”

HSBC has taken some minimal corrective measures. They have implemented better monitoring systems and they have made use of “Know Your Customer” techniques. The bank has also appointed more qualified people including Stuart Levely, a former U.S. Treasury Department Official. HSBC increased its budget 9x-10x  in order to put anti-money laundering systems in place. 

Conclusions – How Should HSBC Be Held Accountable?

HSBC did, on multiple occasions, admit failure in meeting industry-set regulatory standards. They vowed to learn from previous mistakes. So, in taking stock of the situation, what lessons did HSBC learn?  It remains to be seen.

There is no doubt that some of these banks have morphed into such bloated financial institutions that criminal prosecutions may negatively impact both domestic and global economies. These prosecutions do result in the revocation of many banking charters. However, at the very least, prosecuting the key members of financial institutions that willfully encourage money laundering is critical in order to maintain a balance between social and financial progress.

HSBC’s case illustrates the meticulous investigation into the movement and route of illicit and tainted money. However, it is often the case that detailed investigations like this may not necessarily provide a resolution, let alone justice.

Given that there are a variety of ways to approach this controversial topic – a utilitarian approach would validate the DOJ’s decision to let HSBC off the hook by not criminally prosecuting the bank. From the DOJ’s perspective, one of the benefits of this approach includes protecting the economy from potential harm, despite the leniency on criminal conduct. 

This approach primarily looks at its “proportional value and utility.” This essentially means weighing the volume of people who would continue to benefit from the existence of a large-scale financial institution like HSBC compared with the volume of people who would face losses while a bank of this scale remains intact. 

On the contrary, an approach that looks at punishment, retribution, justice, and deterrence works differently. This approach supports adequate punishment for any crime and follows the concept of prevention. The situation is not merely black or white. Here, the punishment is directly proportional to the offense(s) committed. While there are faults in the judicial system, the goal is to simply ensure there are no repeat offenders. Under this approach, the decision-makers in this case completely ignored justice and long-term damages.

Rothschild Brothers of London, 1863,  once said, “The few who understand the system, will either be so interested in its profits or so dependent on its favors, that there will be no opposition from that class.” The question is how long can the government curtail opposition?

Coming up – The Case of Wells Fargo Bank (Part 2)

Image credit: HSBC official logo


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Afia is a lawyer, journalist, an avid traveler, an avid reader, a foodie, and an amateur singer. She enjoys instrumental music with her glass of wine ?

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